US dollar rises, Yen quietly follows

Oil prices briefly fell to an eight-month low below $90 (U.S.) a barrel Monday on speculation that the spreading financial crisis will exacerbate a global economic slowdown and cut demand for crude oil. Another reason for the slumping oil prices is that the U.S. dollar has experienced significant gains against the Euro.

The sudden spike in U.S. currency value on Monday may not come as a surprise to many. Growing investor anxiety that the U.S. bad debt crisis is enveloping Europe and the rescue package is insufficient to respond to growing global economic woes caused the world stock markets to plunge on Monday. Players from hedge funds to major financial institutions are liquidating assets abroad and repatriating U.S. dollars to shore up their balance sheets. The $700 Billion rescue package which is basically a loan from other countries, forces them to exchange their own currencies for U.S..

A stronger U.S. dollar may not be all that bad. It means that the commodities’ prices will drop thus curbing inflation globally. As inflation is curbed, governments around the world would be able to cut their interest rate in the effort of unfreezing the credit markets . The big question is whether these are enough to stop the global recession.

Interesting to note is that the Yen is the only currency holding strong as the increase in rates like LIBOR and drop in credit is forcing speculators to close out carry trades and pay back yen-dominated loans. Carry trades became popular as swings in exchange rates fell to record lows because there was less risk that rapid changes would wipe out profits. Things have certainly changed at the blink of an eye.

So for now, the U.S. dollar should continue to grow against the Euro as the European governments have their hands full trying to save failing banks and their financial system. The Yen should quietly follow.